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International Bancshares Corporation

11/06/2025 | Press release | Distributed by Public on 11/06/2025 12:41

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2024, which are included in our 2024 Annual Report. Operating results for the three and nine months ended September 30, 2025 are not necessarily indicative of the results for the year ending December 31, 2025, or any future period.

Special Cautionary Notice Regarding Forward Looking Information

Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although we believe such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words "estimate," "expect," "intend," "believe" and "project," as well as other words or expressions of a similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors.

Risk factors that could cause actual results to differ materially from any results that we project, forecast, estimate or budget in forward-looking statements include those disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed with the SEC on February 27, 2024, and among others, the following:

●

Local, regional, national, and international economic business conditions and the impact they may have on us, our customers, and such customers' ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral.

●

Volatility and disruption in national and international financial markets.

●

A prolonged U.S. federal government shutdown and its effects on economic activity, regulatory processes, access to public markets, and our customers, including federal employees and contractors.

●

The imposition of new or increased international tariffs and the impact of potential retaliatory tariffs, which may impact our subsidiary banks' business and operations with Mexico.

●

Government intervention in the U.S. financial system.

●

The unavailability of funding from the FHLB, the FRB or other sources in the future could adversely impact our growth strategy, prospects, and performance.

●

Changes in consumer spending, borrowing, and saving habits.

●

Changes in interest rates and market prices, including changes in federal regulations on the payment of interest on demand deposits.

●

Changes in our ability to retain or access deposits due to changes in public confidence in the banking system and the potential threat of bank-run contagion fueled by, among other factors, economic instability, inflationary pressures, the public's increased exposure to social media, and the rapid speed at which communication and coordination via social media can occur.

●

Changes in the capital markets we utilize, including changes in the interest rate environment that may reduce margins.

●

Changes in state and/or federal laws and regulations, including, the impact of the Consumer Financial Protection Bureau ("CFPB") as a regulator of financial institutions, changes in the accounting, tax, and regulatory treatment of trust-preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental, and immigration laws and regulations and the risk of litigation that may follow.

●

Changes in U.S.-Mexico trade, including reductions in border crossings and commerce, integration, and implementation of the United States-Mexico-Canada Agreement, the imposition of tariffs on imported goods from Mexico, and the potential retaliatory tariffs that Mexico may impose on the United States.

●

Political instability in, and strained geopolitical relations between, the United States and Mexico.

●

General instability of economic and political conditions in the United States, including inflationary pressures, increased interest rates, economic slowdown or recession, low productivity growth, declining business investment, concerns regarding the level of U.S. debt, and escalating geopolitical tensions.

●

The reduction of deposits from nonresident alien individuals due to the Internal Revenue Service rules requiring U.S. financial institutions to report deposit interest payments made to such individuals.

●

The loss of senior management or operating personnel.

●

The timing, impact, and other uncertainties of the potential future acquisitions, as well as our ability to maintain our current branch network and enter new markets to capitalize on growth opportunities.

●

Additions to our allowance for credit loss ("ACL") as a result of changes in local, national, or international conditions which adversely affect our customers.

●

Greater than expected costs or difficulties related to the development and integration of new products and lines of business.

●

Increased labor costs and effects related to health care reform and other laws, regulations, and legal developments impacting labor costs.

●

Impairment of carrying value of goodwill could negatively impact our earnings and capital.

●

Changes in the soundness of other financial institutions with which we interact.

●

Political instability in the United States or Mexico.

●

Technological changes or system failures or breaches of our network security, as well as other cybersecurity risks, could subject us to increased operating costs, litigation, and other liabilities.

●

Potential loss of revenue streams and reduction of lower cost deposits as a source of funds resulting from the rise in bank-like products and services from financial technology companies and other alternative financial providers, including blockchain-based financial products and banking-as-a-service platforms.

●

Changes in the regulatory landscape for cryptocurrencies, decentralized finance, and fintech services that favor or otherwise broaden the ability of banks and fintechs to offer alternative financial products, which may subject us to additional competitive pressures and reduce the demand for traditional banking services.

●

Increased compliance and operational costs associated with investing in, adapting to, integrating, and competing with technological developments that incorporate artificial intelligence ("AI") into banking services and products.

●

Flaws in our introduction and use of AI technologies, which could result in increased exposure to security vulnerabilities, data inconsistencies, operational disruptions, and technological inefficiencies that could hamper the customer experience, negatively impact transaction processing, and undermine our risk-management processes.

●

Acts of war or terrorism.

●

Natural disasters or other adverse external events such as pandemics or epidemics.

●

Reduced earnings resulting from the write-down of the carrying value of securities held in our securities available-for-sale portfolios.

●

The effect of changes in accounting policies and practices by the Public Company Accounting Oversight Board ("PCAOB"), the Financial Accounting Standards Board ("FASB") and other accounting standards setters.

●

The costs and effects of regulatory developments or regulatory or other governmental inquiries and the results of regulatory examinations or reviews and obtaining regulatory approvals.

●

The effect of any supervisory and enforcement efforts by the CFPB related to its unfair, deceptive, or abusive acts or practices authority concerning fees charged by financial institutions including late, non-sufficient funds, and overdraft fees, as well as the effect of any other regulatory or legal developments that limit fees and/or overdraft services.

●

Monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the FRB.

●

The reduction of income and possible increase in required capital levels related to the adoption of legislation and the implementing rules and regulations, including those that establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

●

The increase in required capital levels related to the implementation of capital and liquidity rules of the federal banking agencies that address or are impacted by the Basel III capital and liquidity standards.

●

The enhanced due diligence burden imposed on banks related to the banks' inability to rely on credit ratings under the Dodd-Frank Act.

●

The failure or circumvention of our internal controls and risk management, policies, and procedures.

Forward-looking statements speak only as of the date on which such statements are made. It is not possible to foresee or identify all such factors. We make no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

Overview

We are headquartered in Laredo, Texas with 166 facilities and 255 ATMs, and we provide banking services for commercial, consumer and international customers of North, South, Central and Southeast Texas and the State of Oklahoma. We are one of the largest independent commercial bank holding companies headquartered in Texas. We, through our Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a return. We, either directly or through a Subsidiary Bank, own an insurance agency, a liquidating subsidiary, a fifty percent interest in an investment banking unit that owns a broker/dealer, a controlling interest in four merchant banking entities, and a majority ownership in a real-estate development partnership. Our primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, we generate income from fees on products offered to commercial, consumer and international customers. The sales team of each of our Subsidiary Banks aims to match the right mix of products and services to each customer to best serve the customer's needs. That process entails spending time with customers to assess those needs and servicing the sales arising from those discussions on a long-term basis. The Subsidiary Banks have various compensation plans, including incentive-based compensation, for fairly compensating employees. The Subsidiary Banks

also have a robust process in place to review sales that support the incentive-based compensation plan to monitor the quality of the sales and identify any significant irregularities, a process that has been in place for many years.

We are very active in facilitating trade along the United States border with Mexico. We do a large amount of business with customers domiciled in Mexico. Deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of our Subsidiary Banks. We also serve the growing Hispanic population through our facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

Future economic conditions remain uncertain and the impact of those conditions on our business also remains uncertain. Our business depends on the willingness and ability of our customers to conduct banking and other financial transactions. Our revenue streams, including service charges on deposits and banking and non-banking service charges and fees (ATM and interchange income), may be impacted in the future if economic conditions deteriorate. Expense control is an essential element of our long-term profitability. It has been a constant focus of ours for many years and is especially critical during periods of economic uncertainty. We have kept that focus in mind as we continue to look at operations, create efficiencies, and institute cost-control protocols at all levels. We will continue to closely monitor our efficiency ratio, a measure of non-interest expense to net interest income plus non-interest income and our overhead burden ratio, a ratio of our operating expenses against total assets. We use these measures in determining if we are accomplishing our long-term goals of controlling our costs in order to provide superior returns to our shareholders.

Results of Operations

Summary

Consolidated Statements of Condition Information



	September 30, 2025		December 31, 2024		Percent Increase (Decrease)

	(Dollars in Thousands)
Assets	$	16,551,421	$	15,738,852	5.2	%
Net loans		9,245,463		8,653,289	6.8
Deposits		12,455,690		12,111,844	2.8
Securities sold under repurchase agreements		664,380		535,322	24.1
Other borrowed funds		10,384		10,541	(1.5)
Junior subordinated deferrable interest debentures		108,868		108,868	-
Shareholders' equity		3,127,808		2,796,707	11.8

Consolidated Statements of Income Information


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2025		2024		(Decrease)		2025		2024		(Decrease)
Interest income	$	226,778	$	222,657	1.9	%	$	662,384	$	650,418	1.8	%
Interest expense		54,547		54,715	(0.3)			161,437		154,637	4.4
Net interest income		172,231		167,942	2.6			500,947		495,781	1.0
Provision for probable loan losses		1,827		8,602	(78.8)			9,554		30,351	(68.5)
Non-interest income		45,851		43,842	4.6			123,518		129,604	(4.7)
Non-interest expense		79,763		76,215	4.7			231,339		219,966	5.2
Net income		108,375		99,772	8.6	%		305,409		294,083	3.9	%

Per common share:
Basic	$	1.74	$	1.60	8.7	%	$	4.91	$	4.73	3.8	%
Diluted		1.74		1.60	8.7			4.91		4.72	4.0

Net Income

Net income for the three and nine months ended September 30, 2025 increased by 8.6% and 3.9%, respectively, compared to the same periods of 2024. Net income continues to be positively impacted by an increase in interest income earned on our investment and loan portfolios driven primarily by both an increase in the size of the portfolios and the rate environment, which remains elevated as a result of FRB actions to raise interest rates in recent years. Net interest income for the same periods has been negatively impacted by an increase in interest expense, primarily driven by increases in rates paid on deposits. We closely monitor rates paid on deposits to remain competitive in the current economic environment and retain deposits. Net income for the three and nine months ended September 30, 2025 was also positively impacted by a decrease in our provision for credit loss expense. The provision for credit loss expense recorded for the nine months ended September 30, 2024 was primarily impacted by a charge-down of an impaired credit after the results of a bankruptcy related foreclosure. Net income for the three and nine months ended September 30, 2025 was negatively impacted by an increase in our non-interest expenses driven by inflation and increased salary and compensation costs in order to attract and retain staff.

Net Interest Income


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2025		2024		(Decrease)		2025		2024		(Decrease)
Interest Income:
Loans, including fees	$	179,055	$	175,532	2.0	%	$	523,194	$	512,225	2.1	%
Investment securities:		-
Taxable		41,472		40,105	3.4			123,805		113,505	9.1
Tax-exempt		1,503		1,534	(2.0)			4,544		4,619	(1.6)
Other interest income		4,748		5,486	(13.5)			10,841		20,069	(46.0)

Total interest income		226,778		222,657	1.9			662,384		650,418	1.8

Interest expense:
Savings deposits		21,486		20,869	3.0			63,254		61,416	3.0
Time deposits		26,118		25,607	2.0			76,768		70,333	9.1
Securities sold under Repurchase agreements		5,115		6,173	(17.1)			14,059		16,732	(16.0)
Other borrowings		118		74	59.5			2,263		213	962.4
Junior subordinated interest deferrable debentures		1,710		1,992	(14.2)			5,093		5,943	(14.3)

Total interest expense		54,547		54,715	(0.3)			161,437		154,637	4.4

Net interest income	$	172,231	$	167,942	2.6	%	$	500,947	$	495,781	1.0	%

The change in net interest income for the three and nine months ended September 30, 2025 can be attributed to an increase in interest expense as a result of changes in rates we are paying on deposits to remain competitive with rates offered by our competitors. Interest income continues to be positively impacted by interest income earned on our investment and loan portfolios, driven by both an increase in the size of such portfolios and the current rate environment, which remains elevated due to the FRB raising interest rates recent years. Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. As part of our strategy to manage interest rate risk, we strive to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. Our management can quickly change our interest rate position at any

given point in time as market conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Analytical techniques we employ to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by our Investment Committee twice a year (see table on page 47 for the September 30, 2025 gap analysis). Our management currently believes that we are properly positioned for interest rate changes; however, if our management determines at any time that we are not properly positioned, we will strive to adjust the interest rate sensitive assets and liabilities in order to manage the effect of interest rate changes.

Non-Interest Income



	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2025		2024		(Decrease)		2025		2024		(Decrease)

Service charges on deposit accounts	$	19,239	$	18,660	3.1	%	$	54,894	$	55,018	(0.2)	%
Other service charges, commissions and fees
Banking		14,872		14,762	0.7			43,876		43,880	(0.0)
Non-banking		2,423		2,308	5.0			7,408		7,475	(0.9)
Investment securities transactions, net		(1)		(1)	-			(1)		(1)	-
Other investment income (loss), net		3,645		4,180	(12.8)			2,735		8,852	(69.1)
Other income		5,673		3,933	44.2			14,606		14,380	1.6
Total non-interest income	$	45,851	$	43,842	4.6	%	$	123,518	$	129,604	(4.7)	%

Total non-interest income for the three and nine months ended September 30, 2025 increased by 4.6% and decreased by 4.7%, respectively, compared to the same periods of 2024. Non-interest income for the nine months ended September 30, 2025 was negatively impacted due to losses recorded on merchant banking investments and is reflected in other investments, net in the table above.

Non-Interest Expense


	Three Months Ended						Nine Months Ended
	September 30,				Percent		September 30,				Percent
	(Dollars in Thousands)				Increase		(Dollars in Thousands)				Increase
	2025		2024		(Decrease)		2025		2024		(Decrease)

Employee compensation and benefits	$	37,613	$	37,543	0.2	%	$	114,475	$	109,039	5.0	%
Occupancy		7,986		7,746	3.1			21,662		20,109	7.7
Depreciation of bank premises and equipment		5,697		5,594	1.8			16,796		16,938	(0.8)
Professional fees		4,647		4,131	12.5			12,292		12,034	2.1
Deposit insurance assessments		1,797		1,731	3.8			5,330		5,126	4.0
Net operations, other real estate owned		1,546		1,136	36.1			2,912		1,463	99.0
Advertising		1,724		1,397	23.4			5,177		4,679	10.6
Software and software maintenance		5,657		4,820	17.4			16,788		15,783	6.4
Other		13,096		12,117	8.1			35,907		34,795	3.2

Total non-interest expense	$	79,763	$	76,215	4.7	%	$	231,339	$	219,966	5.2	%

Non-interest expense increased by 4.7% and 5.2% for the three and nine months ended September 30, 2025, respectively, compared to the same periods of 2024. Non-interest expense continues to be primarily impacted by an increase in our employee compensation and benefits as we continue to adjust our compensation programs to retain our workforce and remain competitive in the current employment market. We also continue to monitor and manage our controllable non-interest expenses through a variety of measures with the ultimate goal of ensuring we align non-interest expenses with our operations and revenue streams.

Financial Condition

Allowance for Credit Losses

The ACL decreased 0.7 % to $155,506,000 at September 30, 2025 from $156,537,000 at December 31, 2024 primarily due to the charge-off of a loan that had been fully reserved for in prior periods. The provision for credit losses charged to expense decreased 78.8% to $1,827,000 for the three months ended September 30, 2025 compared to $8,602,000 for the same period of 2024. The provision for credit losses charged to expense decreased 68.5% to $9,554,000 for the nine months ended September 30, 2025 compared to $30,351,000 for the same period of 2024. The credit loss charged to expense for the nine months ended September 30, 2024 increased in order to absorb the impact of the charge-down. The ACL was 1.65% of total loans at September 30, 2025 and 1.78% of total loans at December 31, 2024.

Investment Securities

Residential mortgage-backed debt securities are securities primarily issued by Freddie Mac, Fannie Mae, or Ginnie Mae. Investments in debt residential mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. government. Investments in debt residential mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, we believe that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

Loans

Total loans increased by 6.7% to $9,400,969,000 at September 30, 2025, from $8,809,826,000 at December 31, 2024. Commercial real estate loans have historically been the largest category in our loan portfolio and comprise approximately 67% and 65% of total loans at September 30, 2025 and December 31, 2024, respectively. The loans in this category primarily include owner- and non-owner-occupied commercial buildings such as shopping centers, warehouses, hotels and office buildings and are primarily geographically concentrated in central and south Texas and throughout Oklahoma. Commercial real estate loans generally carry a lower risk of loss; however, they may also be significantly more affected by changes in real estate markets or the general economy. We regularly monitor commercial real estate loan concentrations and also have processes and procedures in place to monitor economic conditions that may adversely affect our commercial real estate portfolio.

Deposits

Deposits increased by 2.8% to $12,455,690,000 at September 30, 2025, compared to $12,111,844,000 at December 31, 2024. Deposits have continued to fluctuate as a result of increased general activities by customers, increased competition for deposits by the federal government, and aggressive competitors' pricing. We have closely monitored the rates paid on deposits by competitors and have made changes to our pricing accordingly in order to remain competitive in an effort to retain deposits. The five separately charted banks within our holding company structure also allows us to work with customers to maximize their FDIC insurance levels and provide additional levels of insured deposits.

Foreign Operations

On September 30, 2025, we had $16,551,421,000 of consolidated assets, of which approximately $242,765,000, or 1.5%, was related to loans outstanding to borrowers domiciled in foreign countries, compared to $186,561,000, or 1.2%, at December 31, 2024. Of the $242,765,000, 83.1% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; 2.8% is secured by foreign real estate or other assets; and 14.1% is unsecured.

Critical Accounting Policies

We have established various accounting policies that govern the application of accounting principles in the preparation of our Consolidated Financial Statements. The significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

We consider our estimated ACL as a policy critical to the sound operations of our Subsidiary Banks. The ACL is deducted from the amortized cost of an instrument to present the net amount expected to be collected on the financial asset. Our ACL primarily consists of the aggregate ACL estimates of our Subsidiary Banks. The estimates are established through charges to operations in the form of charges to provisions for credit loss expense. Loan losses or recoveries are charged or credited directly to the ACL. The ACL of each Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions, and reasonable and supportable forecasts.

The estimation of the ACL is based on a loss-rate methodology that measures lifetime losses on loan pools that have similar risk characteristics. Loans that do not have similar risk characteristics are evaluated on an individual basis. The segmentation of the loan portfolio into pools requires a balancing process between capturing similar risk characteristics and containing sufficient loss history to provide meaningful results. Our segmentation starts at the general loan category with further sub-segmentation based on collateral types that may be of meaningful size and/or may contain sufficient differences in risk characteristics based on management's judgement that would warrant further segmentation. Risk management begins with a strong and conservative lending policy that specifies lending limits that are well below allowable regulatory limits, provides highly restrictive lending authority to lending officers, and promotes judicious lending terms and diversification. The general loan categories along with primary risk characteristics used in our calculation are as follows:

Commercial and industrial loans. This category primarily includes loans extended to a diverse array of businesses for working capital or equipment purchases. These loans are mostly secured by the collateral pledged by a borrower that is directly related to the business activities of the borrower's company such as equipment, accounts receivable and inventory. The borrower's abilities to generate revenues from equipment purchases, collect accounts receivable, and to turn inventory into sales are risk factors in the repayment of the loan. A portion of this loan category is related to loans secured by oil and gas production and loans secured by aircraft.

Construction and land development loans. This category includes loans for the development of unimproved land to lot development for both residential and commercial use and vertical construction across residential and commercial real estate classes. These loans carry risk of repayment when projects incur cost overruns, have an increase in the price of construction materials, encounter zoning, entitlement, or environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate. Risks specifically related to 1-4 family development loans also include mortgage rate risk and the practice by the mortgage industry of imposing more restrictive underwriting standards, which inhibits the buyer from obtaining long term financing creating excessive housing and lot inventory in the market.

Commercial real estate loans. This category includes loans secured by farmland, multifamily properties, owner-occupied commercial properties, and non-owner-occupied commercial properties. Owner-occupied commercial properties include warehouses often along the U.S./Mexico border for import/export operations, office space where the borrower is the primary tenant, restaurants and other single-tenant retail spaces. Non-owner-occupied commercial properties include hotels, retail centers, office and professional buildings, and leased warehouses. These loans carry the risk of repayment when market values deteriorate, the business experiences turnover in key management, the business is unable to attract or maintain stable occupancy levels, or the market experiences an exit of a specific business type that is significant to the local economy, such as a manufacturing plant. Our primary risk management tool is internal monitoring measured against internal concentration limits that are significantly lower than regulatory thresholds and are segmented by low-risk and high-risk characteristics, such as the borrower's equity, cash flow coverage, and non-amortizing versus amortizing status, further disaggregated by the length of time to pay in full. This monitoring is regularly reported to senior management and the board of directors. Risk management practices also extend to managing the borrower's relationship with us and are designed to recognize degradation in the borrower's ability to repay under established terms well before the borrower may default. Loan and deposit activity by the borrower is monitored on a frequent basis, which may prompt a change in risk classification. Once a loan is moved to a more severe risk classification, the loan performance, and when applicable, a plan by the borrower to rectify issues are monitored and reviewed at least quarterly. Additionally, our credit administration team, who is independent from the lending team, reviews a substantial portion of the commercial lending portfolio annually, which includes a significant portion of the commercial real estate loan portfolio given the current mix of loans in our portfolio. The table below summarizes the commercial real estate loan portfolio disaggregated by the type of real estate securing the credit as of September 30, 2025 and December 31, 2024:


	September 30, 2025				December 31, 2024
	(Dollars in Thousands)				(Dollars in Thousands)
		Amount	Percent of Total			Amount	Percent of Total
Commercial real estate:

Commercial real estate construction development	$	1,094,570	17.4	%	$	1,313,984	23.0	%
Hotel		1,063,914	17.0			1,080,706	18.9
Retail multi-tenant		722,207	11.5			738,874	12.9
Multi-family		622,232	9.9			310,115	5.4
Lot development: residential and commercial lots		612,017	9.8			513,760	9.0
Office/Professional buildings		511,359	8.2			416,014	7.3
Warehouse		443,213	7.1			435,783	7.6
1 - 4 family construction		385,380	6.2			338,832	5.9
Owner occupied real estate		353,540	5.6			270,584	4.7
Commercial leased properties		331,068	5.3			194,023	3.4
Farmland		122,371	2.0			109,697	1.9
Total commercial real estate	$	6,261,871	100.0	%	$	5,722,372	100.0	%

1-4 family mortgages. This category includes both first and second lien mortgages for the purposes of home purchases or refinancing existing mortgage loans. A small portion of this loan category is related to home equity lines of credits, lots purchases, and home construction. Loan repayments may be affected by unemployment or underemployment and deteriorating market values of real estate.

Consumer loans. This category includes deposit secured, vehicle secured, and unsecured loans, including overdrafts, made to individuals. Repayment is primarily affected by unemployment or underemployment.

The loan pools are further broken down using a risk-based segmentation based on internal classifications for commercial loans and past due status for consumer mortgage loans. Non-mortgage consumer loans are evaluated as one segment. On a weekly basis, commercial loan past due reports are reviewed by our credit quality committee to determine if a loan has any potential problems and if a loan should be placed on our internal Watch List report. Additionally, our

credit department reviews the majority of our loans for proper internal classification purposes regardless of whether they are past due and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process. After the above analysis is completed, we will determine if a loan should be placed on an internal Watch List report because of issues related to the analysis of the credit, credit documents, collateral, and/or payment history.

Our internal Watch List report is segregated into the following categories: (i) Pass, (ii) Economic Monitoring, (iii) Special Review, (iv) Watch List-Pass, (v) Watch List-Substandard, and (vi) Watch List-Doubtful. Loans placed in the Economic Monitoring or Special Review categories reflect our opinion that the loans have potential weaknesses that require monitoring on a more frequent basis. Credits in those categories are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. Loans placed in the Watch List-Pass category reflect our opinion that the credit contains weaknesses that represent a greater degree of risk, which warrants "extra attention." Credits placed in this category are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. Loans placed in the Watch List-Substandard category are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. Those credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market, or political conditions, which may jeopardize repayment of principal and interest under contractual terms. Furthermore, there is a possibility that we may sustain some future loss if such weaknesses are not corrected. Loans placed in the Watch List-Doubtful category have shown defined weaknesses and reflect our belief that it is likely, based on current information and events, that we will be unable to collect all principal and/or interest amounts contractually due. Loans placed in the Watch List-Doubtful category are placed on non-accrual when they are moved to that category.

For the purposes of the ACL, in order to maintain segments with sufficient history for meaningful results, the credits in the Pass and Economic Monitoring categories are aggregated, the credits in the Special Review and Watch List-Pass category are aggregated, and the credits in the Watch List-Substandard category remain in their own segment. For loans classified as Watch List-Doubtful, management evaluates these credits in accordance with FASB ASC Subtopic 326-20, "Financial Instruments - Credit Losses - Measured at Amortized Cost," and, if deemed necessary, a specific reserve is allocated to the loan. The analysis of the specific reserve is based on a variety of factors, including the borrower's ability to pay, the economic conditions impacting the borrower's industry and any collateral deficiency. If it is a collateral-dependent loan, the net realizable fair value of collateral will be evaluated for any deficiencies. Substantially all of our loans evaluated as Watch List - Doubtful are measured using the fair value of collateral method. In rare cases, we may use other methods to determine the specific reserve of a loan if such loan is not collateral dependent.

Within each collectively evaluated pool, the robustness of the lifetime historical loss-rate is evaluated and, if needed, is supplemented with peer loss rates through a model risk adjustment. Certain qualitative loss factors are then evaluated to incorporate management's two-year reasonable and supportable forecast period followed by a reversion to the pool's average lifetime loss-rate. Those qualitative loss factors are: (i) trends in portfolio volume and composition, (ii) volume and trends in classified loans, delinquencies and non-accruals, (iii) concentration risk, (iv) trends in underlying collateral value, (v) changes in policies, procedures, and strategies, and (vi) economic conditions. Qualitative factors also include potential losses stemming from operational risk factors arising from fraud, natural disasters, pandemics, geopolitical events, and large loans. The large loan operational risk factor was added to our ACL calculation beginning in the second quarter of 2023. Because of the magnitude of large loans, they pose a higher risk of default. Recognizing this risk and establishing an operational risk factor to capture that risk, is prudent action in the current economic environment. Large loans are usually part of a larger relationship with collateral that is pledged across the relationship. Defaulting on a larger loan may therefore jeopardize an entire collateral relationship. The current economic environment has created challenges for borrowers to service their debt. Increasing capitalization rates, elevated office vacancies, an upward trend in apartment vacancies and significant increases in interest rates are all contributing to the elevated risk in large loans. Should any of the factors considered by management in evaluating the adequacy of the ACL change, our estimate could also change, which could affect the level of future credit loss expense.

We have elected to not measure an ACL for accrued interest receivable given our timely approach in identifying and writing off uncollectible accrued interest. An ACL for off-balance sheet exposure is derived from a projected usage

rate of any unfunded commitment multiplied by the historical loss-rate, plus model risk adjustment, if any, of the on-balance sheet loan pools.

Our management continually reviews the ACL of the Subsidiary Banks using the amounts determined from the estimates established on specific doubtful loans, the estimate established on quantitative historical loss percentages, and the estimate based on qualitative current conditions and reasonable and supportable two-year forecasted data. Our methodology reverts to the average lifetime loss-rate beyond the forecast period when we can no longer develop reasonable and supportable forecasts. Should any of the factors considered by management in evaluating the adequacy of the estimate for current expected credit losses change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense. While the calculation of our ACL utilizes management's best judgment and all information reasonably available, the adequacy of the ACL is dependent on a variety of factors beyond our control, including, among other things, the performance of the entire loan portfolio, the economy, government actions, changes in interest rates and the view of regulatory authorities towards loan classifications.

Liquidity and Capital Resources

The maintenance of adequate liquidity provides our Subsidiary Banks with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. Our Subsidiary Banks derive their liquidity largely from deposits of individuals and business entities. Deposits from persons and entities domiciled in Mexico comprise a stable portion of the deposit base of our Subsidiary Banks. Other important funding sources for our Subsidiary Banks during 2025 and 2024 were securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor our asset/liability mix in terms of both rate sensitivity and maturity distribution. Our Subsidiary Banks have had a long-standing relationship with the FHLB and keep open significant unused lines of credit in order to fund liquidity needs. We also maintain a sizable, high quality investment portfolio to provide significant liquidity. These securities can be pledged to the FHLB, sold, or sold under agreements to repurchase to provide immediate liquidity. The following table summarizes our short-term balancing capacities net of balances outstanding:


		September 30,
		2025
	(in Thousands)
Unsecured fed funds lines available from commercial banks	$	50,000
Unused borrowings capacity from FHLB ⁽¹⁾		3,398,464
Unused borrowings capacity under Federal Reserve discount window		501,491
Unpledged investment securities ⁽²⁾		3,332,278
	$	7,282,233

(1) FHLB borrowings are collateralized by a blanket floating lien on certain real estate secured loans and mortgage finance assets
(2) Market value

We maintain an adequate level of capital as a margin of safety for our depositors and shareholders. At September 30, 2025, shareholders' equity was $3,127,808,000 compared to $2,796,707,000 at December 31, 2024. The increase in shareholders' equity can be primarily attributed to the retention of earnings offset by shareholder dividends paid.

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amount and classifications are also subject to qualitative judgements by regulators about components, risk-weighting and other factors.

In July 2013, the FDIC and other regulatory bodies established a new, comprehensive capital framework for U.S. banking organizations, consisting of minimum requirements that increase both the quantity and quality of capital

held by banking organizations. The final rules are a result of the implementation of the Basel III capital reforms and various related capital provisions of the Dodd-Frank Act. Consistent with the Basel international framework, the rules include a new minimum ratio of Common Equity Tier 1 ("CET1") capital to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 capital to risk-weighted assets above the minimum requirement but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. We believe that as of September 30, 2025, we meet all fully phased-in capital adequacy requirements.

In November 2017, the OCC, the FRB and the FDIC finalized a proposed rule that extends the current treatment under the regulatory capital rules for certain regulatory capital deductions and risk weights and certain minority interest requirements, as they apply to banking organizations that are not subject to the advanced approaches capital rules. Effective January 1, 2018, the rule also paused the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests. The agencies are also considering whether to make adjustments to the capital rules in response to CECL (the FASB Standard relating to current expected credit loss) and its potential impact on regulatory capital. Pursuant to rules issued by the federal bank regulatory agencies in February 2019 and March 2020, banking organizations were given options to phase in the adoption of CECL over a three-year transition period through December 31, 2022 or over a five-year transition period through December 31, 2024. Rather than electing to make one of the phase-in options, we immediately recognized the capital impact upon adopting CECL accounting standards on January 1, 2020, which resulted in an increase in our allowance for probable loan losses and a one-time cumulative-effect adjustment to retained earnings upon adoption.

In December 2017, the Basel Committee on Banking Supervision unveiled its final set of standards and reforms to its Basel III regulatory capital framework, commonly called "Basel III Endgame" or "Basel IV." The Basel IV framework makes changes to the capital framework first introduced as "Basel III" in 2010 and aim to reduce excessive variability in banks' calculations of risk-weighted capital ratios. Implementation of Basel IV began on January 1, 2023 and will continue over a five-year transition period by regulators in individual countries, including the U.S. federal bank regulatory agencies. The U.S. targeted implementation of Basel IV to begin on July 1, 2025, subject to a three-year transition period with full compliance expected by July 1, 2028. However, the future implementation of Basel IV remains unclear, as the Federal Reserve continues to review the Basel IV rules and has indicated that it may craft a new risk-based capital rule that would be less onerous for banks and require less stringent capital requirements.

As of September 30, 2025, our capital levels continue to exceed all capital adequacy requirements under the Basel III capital rules as currently applicable to us.

On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 ("EGRRCPA") was enacted, and, among other things, it includes a simplified capital rule change that effectively exempts banks with assets of less than $10 billion that exceed the "community bank leverage ratio," from all risk-based capital requirements, including Basel III and its predecessors. The federal banking agencies must establish the "community bank leverage ratio" (a ratio of tangible equity to average consolidated assets) between 8% and 10% before community banks can begin to take advantage of this regulatory relief provision. Some of the Subsidiary Banks, with assets of less than $10 billion, may qualify for this exemption. Additionally, under the EGRRCPA, qualified bank holding companies with assets of up to $3 billion (currently $1 billion) will be eligible for the FRB's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, which eases limitations on the issuance of debt by holding companies. On August 28, 2018, the FRB issued an interim final rule expanding the applicability of its Small Bank Holding Company Policy Statement. While holding companies that meet the conditions of the policy statement are excluded from consolidated capital requirements, their depository institutions continue to be subject to minimum capital requirements. Finally, for banks that continue to be subject to the Basel III's risk-based capital rules (e.g., assignment of 150% risk weight to certain exposures), certain commercial real estate loans that were formally classified as high volatility commercial real estate ("HVCRE") will not be subject to heightened risk weights if they meet certain criteria. Also, while acquisition, development, and construction loans will generally be subject to heightened risk

weights, certain exceptions will apply. On September 18, 2018, the federal banking agencies issued a proposed rule modifying the agencies' capital rules for HVCRE.

We had a CET1 to risk-weighted assets ratio of 23.20% on September 30, 2025 and 22.42% on December 31, 2024. We had a Tier 1 capital-to-average-total-asset (leverage) ratio of 19.35% and 18.84%, risk-weighted Tier 1 capital ratio of 23.80% and 23.06%, and risk-weighted total capital ratio of 24.99% and 24.31% at September 30, 2025 and December 31, 2024, respectively. Our CET1 capital consists of common stock and related surplus, net of treasury stock, and retained earnings. We and our Subsidiary Banks elected to opt-out of the requirement to include most components of accumulated other comprehensive income (loss) in the calculation of CET1 capital. CET1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities and subject to transition provisions. Tier 1 capital includes CET1 capital and additional Tier 1 capital. Additional Tier 1 capital includes the Capital and Common Securities issued by the Trusts (see Note 8 above) up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold qualifies as Tier 2 capital. As of September 30, 2025 and December 31, 2024, the total of $108,868,000 of the Capital and Common Securities outstanding qualified as Tier 1 capital. We actively monitor the regulatory capital ratios to ensure that our Subsidiary Banks are well-capitalized under the regulatory framework.

The CET1, Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk-weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.

We and our Subsidiary Banks are subject to the regulatory capital requirements administered by the Federal Reserve, and, for our Subsidiary Banks, the FDIC. Regulatory authorities can initiate certain mandatory actions if we or any of our Subsidiary Banks fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of September 30, 2025, that we and each of our Subsidiary Banks continue to meet all capital adequacy requirements to which we are subject.

We will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipate fluctuations in interest rates by adjusting the balance between sources and uses of funds as deemed appropriate. The net-interest rate sensitivity as of September 30, 2025 is illustrated in the table entitled "Interest Rate Sensitivity," below. This information reflects the balances of assets and liabilities for which rates are subject to change. A mix of assets and liabilities that are roughly equal in volume and re-pricing characteristics represents a matched interest rate sensitivity position. Any excess of assets or liabilities results in an interest rate sensitivity gap.

We undertake an interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. As indicated in the table, we are asset sensitive in both the short- and long-term scenarios. Our Asset and Liability Committee semi-annually reviews the consolidated position along with simulation and duration models, and makes adjustments as needed to control our interest rate risk position. We use modeling of future events as a primary tool for monitoring interest rate risk.

Interest Rate Sensitivity

(Dollars in Thousands)


	Rate/Maturity
			Over 3		Over 1
	3 Months		Months to		Year to 5		Over 5
September 30, 2025	or Less		1 Year		Years		Years		Total

	(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	250,612	$	750,178	$	3,854,680	$	134,818	$	4,990,288
Loans, net of non-accruals		7,826,333		193,827		484,256		742,671		9,247,087

Total earning assets	$	8,076,945	$	944,005	$	4,338,936	$	877,489	$	14,237,375

Cumulative earning assets	$	8,076,945	$	9,020,950	$	13,359,886	$	14,237,375

Rate sensitive liabilities

Time deposits	$	1,366,962	$	1,639,521	$	127,234	$	-	$	3,133,717
Other interest bearing deposits		4,743,060		-		-		-		4,743,060
Securities sold under repurchase agreements		652,801		11,579		-		-		664,380
Other borrowed funds		-		-		-		10,384		10,384
Junior subordinated deferrable interest debentures		108,868		-		-		-		108,868

Total interest bearing liabilities	$	6,871,691	$	1,651,100	$	127,234	$	10,384	$	8,660,409

Cumulative sensitive liabilities	$	6,871,691	$	8,522,791	$	8,650,025	$	8,660,409

Repricing gap	$	1,205,254	$	(707,095)	$	4,211,702	$	867,105	$	5,576,966
Cumulative repricing gap		1,205,254		498,159		4,709,861		5,576,966
Ratio of interest-sensitive assets to liabilities		1.18		0.57		34.10		84.50		1.64
Ratio of cumulative, interest-sensitive assets to liabilities		1.18		1.06		1.54		1.64

International Bancshares Corporation published this content on November 06, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 06, 2025 at 18:42 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]